Table of Contents
- Introduction
- What type of crypto companies are MSBs?
- MSB: What is a money transmitter?
- FinCEN vs crypto money transmitters
- Four compliance steps for crypto MSBs to complete
- What happens if a crypto MSB doesn’t comply with FinCeN
- What’s next: Consult with Kelman Law
Introduction
If you’re a U.S. business that deals with cryptocurrencies on a frequent basis, you’re most likely familiar with the legal concepts “money service business” (MSB) and “money transmitter”. If not, you’re potentially opening yourself up for a world of hurt by not complying with federal and state anti-money laundering (AML) regulations.
The United States’ federal legislation views cryptocurrency as a commodity, which therefore brings it under the purview of federal regulators, most notably the Financial Crimes Enforcement Network. FinCEN requires companies who deal with commodities to be registered as money service businesses (MSBs).
More specifically, regulators view most crypto-related businesses in the U.S. as money transmitters. This subjects these companies to the United States’ Bank Secrecy Act (BSA), which requires them to register and get an appropriate license in each U.S. state, apart from Montana.
The BSA is a vital AML compliance cornerstone in the U.S.’ fight against money laundering and terrorism funding, and its influence has even permeated to help shape global regulations like the Financial Action Task Force’s Travel Rule.
What type of crypto companies are MSBs?
Short answer: Pretty much all of them.
In 1999 FinCEN revised existing rules of how non-bank financial institutions are classified by the BSA. Certain financial institutions were grouped together into a category called “Money Service Businesses” (MSBs), of which “money transmitter” was one.
In 2011, FinCEN issued the “MSB Final Rule” to define a money service business as “a person wherever located doing business, whether or not on a regular basis or as an organized or licensed business concern, wholly or in substantial part within the United States,” operating directly, or through an agent, agency, branch, or office, who functions as, among other things, a “money transmitter.”
Broadly speaking, there are five categories of MSBs:
- Currency dealers or exchangers
- Check cashers
- Traveler’s check or money order issuers
- Traveler’s check or money order sellers or redeemers
- Money transmitters
It follows then that while all money transmitters are money service businesses, not all MSBs are money transmitters.
What is a money transmitter?
FinCEN defines a money transmitter as someone that acts as an intermediary between two parties that send or exchange money for another currency. To operate as a money transmitter, a business is legally required to be registered on a federal level and licensed in the states that it operates in.
By federal law 18 USC § 1960, U.S. businesses whose activities fall under the state definitions of a money transmitter, are required to register for a money transmitter license.
Cryptocurrency-dealing businesses are not exempt from these requirements. In the virtual currency realm, these regulatory requirements could apply to companies such as Bitcoin ATMs, payment processors, exchanges, certain wallet providers and possibly even dApps.
To secure a cryptocurrency money transmitter license, businesses need to follow the steps detailed further down to ensure they are in compliance with state and federal laws.
FinCEN vs Crypto Money Transmitters
After years of legal and regulatory ambiguity, FinCEN finally extended this requirement to the virtual currency industry. In its guidance the Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies, published on 18 March 2013,the AML watchdog made it clear that in terms of money transmission legislation, it did not differentiate between fiat currency and virtual currency like Bitcoin.
According to FinCEN, a “money transmitter” is defined as a person who provides money transmission services, or engages in the transfer of funds.
“Money transmission services” equal the “acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds or other value that substitutes for currency to another location or person by any means.
Notice the phrase “other value that substitutes for currency”- this specifically accommodated virtual currencies.
This meant that companies who accepted virtual currency from one party to another party and vice versa, or exchange fiat currency for any digital currency, or even just accepted crypto from customers on behalf of a merchant, were considered money transmitters.
However, individuals and businesses who simply exchanged cryptocurrencies like Bitcoin for products and services, and vice versa, were not.
The March 2013 guidance aimed to clarify and provide regulatory certainty for the virtual currency industry, by creating 3 separate classifications for crypto entities:
- Users: individuals who acquire virtual currency and exchange it for products and services (non-money transmitters)
- Exchangers: individuals who as a business exchange virtual currency for fiat or other virtual currency (money transmitter)
- Administrators: individuals who engage as a business in issuing virtual currency and are able to redeem it or take it out of circulation.
Despite these regulatory guidelines, FinCEN does recognize that a business is not automatically considered a money transmitter if it carries out some of these activities, and is careful not to commit to a one-size-fits-all rule of its laws. There is no black-and-white interpretation. As with much of the legal world, things are open to interpretation. Therefore, it is vital for crypto companies and individuals to get a professional opinion from a compliance and legal expert.
What regulatory steps must U.S. MSBs complete?
Complying with MSB regulatory requirements can be a daunting and confusing experience. It’s important to focus on the fundamental requirements first: namely registering with the federal government, creating an AML program and finally, applying for a money transmitter license at state-level.
Step 1: Federal Registration
If you’re a crypto company who is considered to be a money service business, the first step is to register as one with the federal government. A FinCEN requirement since 2011, the most cost-effective and simplest way is to complete and file your registration at the online BSA eFiling System here. Part of the process involves preparing and maintaining an agent list as well.
Step 2: Creating an AML Program
Registration done and dusted? Excellent. Next on the to-do list before you start selling products and offering good is something considerably tougher. You’ll need to establish an efficient AML program that meets FinCEN’s basic standards. This ensures you effectively screen and onboard your customers and put in place the necessary resources and staff to combat potential money laundering and terrorism financing.
Some AML Program essentials to incorporate:
- Employing an AML compliance officer
- Establishing AML control measures
- Independently reviewing your compliance program
- Training your staff in executing this program
To ensure that you develop a resilient and adequate AML program, it is advisable that you consult with an AML compliance specialist such as Kelman Law to cover all angles.
What is a Suspicious Activity Report? (SAR)
In 1998 FinCEN established its Suspicious Activity Report (SAR) requirement for MSBs as its centerpiece in utilizing the Bank Secrecy Act (BSA) to combat financial crime. With the introduction of the Patriot Act III following the watershed 911 terrorism attacks, SARs have become an essential part of the AML/CFT policies of regulators both in the U.S and globally.
It is important for MSBs to distinguish between Currency Transaction Reports (CTR) and Suspicious Activity Report (SAR) requirements.
U.S.-operating MSBs are by law required to file within 15 days a Currency Transaction Report (CTR) that involves ANY cash transaction or series of transactions that exceeds $10,000 per person on the same day.
However, MSBs are also obligated to report any suspicious transactions over $2,000 in value.
What constitutes a suspicious activity? This FinCEN guidance on SARs goes into more detail.
Since 2013, MSBs have been required to file their SARs at the BSA eFiling online portal as well (visit this link).
Step 3: Getting a State-issued Money Transmitter License (MTL)
Registered with FinCEN and established a thorough AML program? Sorry, but FinCEN has saved the worst for last. After complying with all the federal level MSB procedures, FinCEN now requires your cryptocurrency MSB to obtain a license in every state you intend to do business in.
All U.S. states, except Montana, will define you and your business as a money transmitter if you receive money and send it elsewhere. Montana does not have money transmitter laws and you therefore don’t need a license from the state.
Unfortunately, U.S. states take wildly different stances when it comes to regulating cryptocurrency businesses. While certain jurisdictions are decidedly pro-virtual currency, many others take a neutral viewpoint or issue strict regulations, sometimes at the drop of a hat, that stifle their local crypto industry.
Due to the relative newness and fast-moving nature of the cryptocurrency industry, virtual currency regulation at state-level is a complex confluence of different laws and regulations that has to be digested and dealt with on a state-by-state approach.
What happens if a crypto MSB doesn’t register with FinCEN?
According to FinCEN, ignorance of the law is simply no excuse. The federal regulator frequently publishes clarifying guidances online and expects U.S. financial institutions to stay up to speed with its requirements.
Failure to register as an MSB can result in a civil penalty of $5,000 per transgression, or a maximum of five years in prison.
In a landmark action in 2019, FinCEN penalized the first peer-to-peer crypto exchanging individual, Eric Powers, for violating AML regulations. Mr Powers failed to adhere to the money service business regulatory requirements detailed above.
After admitting his guilt, Powers was fined $35,000 and barred from providing money transmission services again. FinCEN director Ken Blanco issued a clear statement after the case: “Obligations under the BSA apply to money transmitters regardless of their size.””
Where to start
So, the big question is: Are you a money service business by law? The short answer is, most likely. The only way to get surety on your status is to consult with a legal or regulatory expert that specializes in cryptocurrency and AML compliance matters.
In our next article, we’ll start diving into state-level money transmitter licensing for crypto companies.
About Kelman Law
Kelman Law has been helping crypto companies since 2018 to comply with U.S. regulations and get registered and licensed. Lawyers Zachary and Daniel Kelman have a proven track record in helping cryptocurrencies investors and businesses that extends all the way back to the 2014 Mt. Gox hack and a crypto bill in 2013. To get in touch, email us at info@kelman.law for a free 30-minute consultation.
